Cash woes? A personal loan to the rescue!

    What happens if you miss payments on your Personal Loan

    Personal loans are very convenient and easy-to-obtain loans. Being unsecured in nature, personal loans do not require you to pledge any of your assets as collateral security against the loan amount. This means that the only guarantee the bank has in giving you a personal loan is the higher than normal interest rates charged, and your monthly income. If you really think about it, personal loans are a leap of faith on the part of the bank!

    Now, as long as you are paying your Equated Monthly Instalments (EMIs) on time and ensuring that the loan is being repaid, all is rosy and good. But what happens if you miss paying one or more of your EMIs? Well, don’t miss a payment in order to find out, because we are going to tell you the consequences of missing payments on your personal loan in this article.

    Penalty for missing a loan instalment

    Let’s say you took a personal loan of S$10,000 for a tenure of 5 years, for your wedding. The EMI would come to around S$234 if the Effective Interest Rate (EIR) is 15.07%. Ideally, there is no reason why you shouldn’t be able to pay this EMI, because the amount is not very large. However, let’s assume that you were caught up with some work deadlines and forgot to pay an EMI this month. What happens next?

    • Late payment penalty: Every EMI you miss will attract a late payment fee. Some banks may charge a specific percentage of the outstanding amount as late payment fee, while others may increase the EIR until you make certain number of payments on time consecutively. For example, Standard Chartered adds 4% interest per annum to its EIR on its CashOne personal loan if you make late payments on 2 EMIs in a 6-month period. The original EIR will be restored if EMIS are paid in full and on time for 6 months in a row.
    • Loan tenure extension: Many banks extend the tenure by as many instalments as you skip. Alongside late payment charges, tenure extension would increase the total amount you pay back to the bank.
    • Incessant reminders from the bank: If you skip more than 2 payments, the bank is likely to start sending you reminders and calling you for repayments regularly. Until you make your next payment or pay the dues, you are likely to be hounded by the lender. This would definitely be an annoying situation to be in!
    • Default on loan account: Missing one or 2 instalments on your personal loan will not be a big deal to your creditor. However, more than 3 misses, and the loan account will be considered as being in default in Singapore. Defaulted account does long-term damage to your credibility by not only bringing down the credit score considerably, but it is also recorded in your credit report either for 3 years or indefinitely, depending on the status of the loan account.
    • Legal action and threat to assets: If you default on your loan, the bank will move the court for a settlement. Since personal loans are unsecured loans, the bank doesn’t have any collateral that they can auction or sell and get their money back. So they would take legal action against you and get the court to extract the loan amount and damages from you. Your bank accounts may be seized. They might go for settlement of the dues at a negotiated amount, depending on how the case moves. If it turns out that you have no means to pay the money required, one or more of your assets might be in danger of being taken over by the lender. In any case, legal action is not likely to do you any good.
    • Credit score will be hit: Late payments and defaults have a direct impact on your credit report and credit score. More than 2 late payments will start bringing your score down, and a default would hasten the plunge. Repairing your credit score after such serious damages would take years of good credit behaviour and cannot be accomplished in a few months. In addition, default records go into your report for all future lenders to see. Default records with the status of ‘Negotiated Settlement’ or ‘Full Settlement’ will remain on the report for 3 years from the date of settlement, while records with the status of ‘Outstanding’ and ‘Partial Payment’ will be on your file indefinitely.
    • Credibility will be impacted: The end result of all this would be that your credibility as an honest citizen will take a bad hit. No lender would approve your application easily, at least for the 3 years after a loan that is settled post-default. Until you are able to repair the damage caused to your credit report, your risk level as a customer will remain high. You will not be able to convince anyone of your integrity in credit behaviour, and you will not be considered creditworthy. Moreover, many companies these days ask to see your credit report before hiring you. A black mark on the report might be enough for you to be unable to secure your dream job.

    How to ensure that you do not miss a personal loan payment

    The best ways to ensure that you don’t miss a personal loan payment are:

    • Include it in your budget: When you make your monthly budget, include the personal loan EMI in it. This will ensure that you don’t spend off the amount that is actually needed for the instalment payment.
    • Auto-debit: Link your loan account and savings account, and convert the monthly instalment into an auto-debit transaction. This will ensure that the money is deducted directly from your account on a specific date every month and there is no reason for a miss. Ensure that you keep the deduction date in the first few days of the month so that the payment will not be missed due to shortage of funds in your account.
    • Reminders: If it is not possible to set an auto-debit transaction for the loan amount, keep a reminder on your calendar – phone or email – to pay your EMI at least 5 days before the due date. When the reminder actually comes up on your screen, don’t ignore it; make the payment immediately.

    Other useful tips about personal loan defaults and late payments

    If you have been in default or missed payments consecutively, remember the following things:

    • Do not panic. Try to be level-headed and think of a solution to the problem, rather than losing your sleep and sanity over it.
    • Cut down your expenses. As soon as you can, cut down your expenses and live minimally, until you pay off the dues. Splurging with a debt circle on your head is equivalent to digging your own financial grave.
    • Do not apply for another loan. Until you are clear of one loan and your credit score is restored to decent numbers, do not even think of taking another loan. It’ll only get worse and you’ll get into a debt trap.
    • Try to settle the loan with the bank. Go for a negotiation on the settlement amount, and there are chances that the bank will allow you to pay a certain amount – less than what you owe currently – and close the loan account.
    • Deal with savings. Tap your savings for the repayment if need be, but don’t take off the entire savings to close one personal loan. Remember that you may need the money later for more urgent purposes such as a medical emergency for you or a family member.

    It is important to be aware of the consequences of not making your personal loan instalment payments on time. It is also equally important to ensure that you maintain financial discipline in order to make the payments regularly, and on time.

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